I still remember my first break-up. Flash back to eighth grade, where Katie, a cute strawberry blonde with dimples, utters the classic break-up line in the school hallway: “It’s not you, it’s me”—followed by some explanation about how she is not ready for a relationship, blah, blah, blah. How is this supposed to help me?
Flash forward thirty years (give or take a decade) as I attend meetings where lenders to infrastructure in Sub-Saharan Africa insist that the money is there, the capital is available, but the projects are not. The government is not doing its part. They say, “It’s not me, it’s you!” Ouch, that is
an even worse break-up line.
But is it true? Is the capital really there?
First, to agree with the lenders, the projects are there, but they are not well prepared. There are a number of reasons for this, which are discussed in more detail in the article “Africa demands transparency” on page 16. Basically, governments around the world tend to look for the fast, cheap way to bring projects to market, which means doing as much as possible in-house. Sub-Saharan Africa suffers from a distinct lack of understanding about what it takes to bring a good public-private partnership (PPP) project to market.
A-courting we will go
To complicate matters, Sub-Saharan African government officials receive a constant stream of visits from foreign governments and company delegations promising fast, cheap results if they could only have an exclusivity agreement for some large infrastructure project. These rarely work out, but they seem to be far too tempting for Sub-Saharan African governments short on time and cash. To add to the misery, new recent natural resource finds in various countries (in particular Ghana, Mozambique, Tanzania, and Uganda) distract even further from the economy and efficiency sought from PPP.
Now to the question of available capital. There seem to be a number of challenges remaining, and it may be a little early to declare a job well done. Local currency markets are anemic and distracted by property development at the riskier end of the spectrum, and treasuries at the safe end. The interest rates on local debt tend to be high, tenors short, grace periods elusive, and capacity limited. Except in a few key countries (for example, Kenya and Nigeria), attracting local finance for PPP can be an arduous affair.
But then when lenders claim that capital is available, they are probably not talking about local currency. Capital in the global currencies has many of the characteristics needed for financing PPPs: long tenors (12 years plus), grace periods, high liquidity, and bankers thoroughly experienced in PPP and limited recourse financing.
Tying the knot
There are also significant challenges to making this match, such as:
Risk aversity. Like it or not, global capital marches to a different tune. Compared with local financial markets, it is generally more familiar with investment grade lending into countries with reliable legal systems and relatively robust secondary markets for those assets. In Sub-Saharan Africa, government credit ratings are low (below investment grade), and subsovereign, public utilities that act as project counterparts are often insolvent. Credit concerns can be addressed through financial engineering (including escrow accounts, letters of credit, stand-by capital, and natural resource rights), lending from development financiers (like IFC, FMO, and DBSA), and credit enhancement from IFIs (like the World Bank and MIGA) and export credit agencies (like US Exim and China Exim). The need for heavy structuring is not specific to Sub-Saharan Africa, nor is it a critical problem. But it translates into greater time, cost, and complexity invested in mobilizing capital. It also imposes a major caveat on the claim that the “capital is available.”
Foreign exchange risk. This is a problem in any country where local financial markets or hedging markets cannot convert the local currency revenues into foreign capital to repay debt. The debt exposure and extensive fiscal constraints in much of Sub-Saharan Africa impedes the ability to manage foreign exchange risk exposure. (West Africa, with its common currency pegged to the Euro, escapes much of this complexity.)
Global banks lack experience in infrastructure in Africa outside of commodities deals with higher profits, forex revenues, and lower risk. This is for the very good reason that few such deals have been done in Sub-Saharan Africa. But flying bankers in from Europe and the U.S.—bankers with experience in developed countries, rather than in Africa itself—creates its own challenges.
My point is simple: the statement “the capital is available, but the projects are not,” while displaying an impressive bravado, is not entirely accurate, and not at all helpful. We all have a lot of work to do to get African PPPs moving, from both public and private sides. There will be time for pointing fingers later, once the job is done.
And Katie, if you are out there, you were wrong. It was me.